On June 26,
2017, the United States Supreme Court issued its opinion on California Public Employees’ Retirement
System v. ANZ Securities, Inc., No. 16-373, ruling that actions
involving securities offerings and sales are subject to a three-year statute of
repose, which is an absolute deadline that cannot be tolled. The Court’s
opinion was based upon its interpretation of the interplay between Sections 11
and 13 of the Securities Act of 1933 (the Securities Act). Justice Anthony
Kennedy delivered the opinion of the Court, in which Chief Justice John Roberts
and Justices Clarence Thomas, Samuel Alito and Neil Gorsuch joined. Justice
Ruth Bader Ginsburg filed a dissenting opinion, in which Justices Stephen
Breyer, Sonia Sotomayor and Elena Kagan joined.

Background

In 2007 and
2008, the California Public Employees’ Retirement System (CalPERS), a public
pension fund, acquired securities issued by Lehman Brothers Holdings Inc.
through a series of public securities offerings. In 2008, a putative class
action, of which CalPERS was a part, was filed against various financial firms
in the Southern District of New York alleging liability under Section 11 of the
Securities Act for material misstatements or omissions in the registration
statements relating to the Lehman Brothers securities offerings.

In February
2011, more than three years after the Lehman Brothers securities offerings,
CalPERS filed a separate complaint against the various financial firms in the
Northern District of California. CalPERS’ individual complaint alleged the same
violations as those cited in the class action. The financial firms moved to
dismiss the separate complaint filed by CalPERS on the grounds that the action
was untimely since it was brought more than three years after the Lehman
Brothers offering. CalPERS argued that the three-year period should be tolled
as a result of the class action filing. The trial court, the US Court of Appeals
for the Second Circuit and ultimately the Supreme Court ruled against CalPERS,
holding that the principle of tolling was inapplicable to the three-year time
limit imposed by Section 13.

The
CalPERS Decision

Section 11 of
the Securities Act generally provides that purchasers of securities in a
registered offering shall have a right of action against the issuer, the
underwriter of the securities and certain other individuals for any untrue
statement of a material fact in, or a material omission from, a registration
statement. The civil liabilities imposed by Section 11 are limited by Section
13 of the Securities Act, which requires any such action to be brought by a
claimant within a specified time period. In part, Section 13 provides that any
Section 11 action must be brought “within one year after the discovery of the
untrue statement or the omission, or after such discovery should have been made
by the exercise of reasonable diligence.” Importantly, the second sentence in
Section 13 imposes an additional time limit on any action under Section 11 by
providing that “[i]n no event shall any such action be brought . . . more than
three years after the security was bona
fide offered to the public ....”

The Supreme
Court’s decision in the CalPERS case was based upon the majority’s view that
the three-year time limit set forth in the second sentence in Section 13
constitutes a statute of repose rather than a statute of limitations. In the
decision, Justice Kennedy distinguished the two categories of time limits as
follows: statutes of limitations are designed to encourage plaintiffs “to
pursue diligent prosecution of known claims,” while statutes of repose
explicitly protect defendants by effecting “a legislative judgment that a
defendant should be free from liability after the legislatively determined
period of time.”

The majority of
the Justices were not persuaded by the various arguments that CalPERS presented
in favor of tolling the three-year period. For example, CalPERS argued that
filing the class action complaint within three years should also satisfy the
statutory time limit with regard to any future suit filed by individual parties
that comprise the class because the defendants were effectively on notice that
each individual member could bring an action. CalPERS also argued that by
declining to allow for tolling, the Supreme Court’s decision will create
inefficiencies in the courts by inducing members of a class action to file
duplicative individual cases.

The dissenting
Justices were sympathetic to CalPERS’ equity-based arguments, and warned that
the majority’s ruling would jeopardize the Constitutional right of individual
investors (particularly unsophisticated class members) to opt out of a class
settlement because class certification decisions often are not made until two
to three years after securities class actions are filed. As a result, the
three-year period of repose could easily pass before such investors were asked
to decide whether they wanted to opt out of a class settlement. But the
majority held that the plain language in Section 13 makes it evident that the
three-year time limit is a statute of repose, which cannot be extended by a
court on the basis of equitable principles. As a result, actions under Section
11 must be brought within three years of the issuer’s bona fide offer to the
public.1

Looking
Ahead

The Supreme Court’s
decision in the CalPERS case will likely have a significant impact on how
plaintiffs pursue civil actions under Section 11 of the Securities Act. While
issuers and underwriters will benefit from the firm three-year time limit, it
is likely that any class action under Section 11 will be accompanied by an
increased number of identical individual actions. And both class counsel and
the district courts may well heed the admonition of the dissenting Justices
that class members should be notified of the “consequences of failing to file a
timely protective claim.”
_________1The question of precisely when an issuer’s bona fide offer will be
deemed to have commenced can be complicated and has itself been the subject of
litigation without any clear resolution.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

Contact Eversheds Sutherland (US) LLP - Washington Office

Choose Area of Practice Invalid Area of Practice is requiredFirst Name Invalid First Name is requiredLast Name Invalid Last Name is requiredE-mail Address Invalid E-mail Address is required

Describe Your Legal Matter

{{ (description ? description.length : 0) + '/1000 characters' }}

Invalid Legal Matter is required

Country Invalid Country is requiredZipInvalidZipis requiredCity/Town/LocalityInvalid City/Town/Locality is requiredState/Province/DistrictInvalid State/Province/District is requiredPhone Number Invalid Phone Number is required
Preferred Contact Method

By clicking on the "Submit" button, you agree to the
Terms of Use,
Supplemental Terms
and
Privacy Policy.
You also consent to be contacted at the phone number you provided, including by autodials, text messages and/or pre-recorded calls, from Martindale and its affiliates and from or on behalf of attorneys you request or contact through this site. Consent is not a condition of purchase.

You should not send any sensitive or confidential information through this site. Emails sent through this site do not create an attorney-client relationship and may not be treated as privileged or confidential. The lawyer or law firm you are contacting is not required to, and may choose not to, accept you as a client. The Internet is not necessarily secure and emails sent though this site could be intercepted or read by third parties.

The information provided on this site is not legal advice, does not constitute a lawyer referral service, and no attorney-client or confidential relationship is or should be formed by the use of this site. The attorney listings on the site are paid attorney advertisements. Your access of/to and use of this site is subject to additional Supplemental Terms.